22 November 2005 External T.I. 2005-0150821E5 - revocable living trust resident in Canada

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Does the transfer of jointly owned property located in the US by a married couple over the age of 65 who are resident in Canada to a "revocable living trust" result in any tax consequences at the time of the transfer?

Position: Provided that the conditions in ss 73(1.01) are met and the trustee(s) are resident in Canada, each spouse can transfer his or her share of the property to a joint spousal or common-law partner trust with no immediate consequences. Ss 75(2) will apply to attribute any income earned by the revocable living trust to the contributors throughout the period that they are resident in Canada and the trust will be subject to a deemed disposition at the end of the time on which the later of them dies.

Reasons: general comments explaining the conditions necessary for a rollover under section 73

XXXXXXXXXX  2005-015082
            Annemarie Humenuk
November 22, 2005

Dear XXXXXXXXXX:

Re: Transfer of Property to a Trust Resident in Canada

This is in reply to your letter of November 14, 2005, in which you ask for confirmation of the tax consequences that would apply if your parents, who are resident in Canada, transfer their U.S. real property to a trust resident in Canada.

The terms of the trust are that your parents would be entitled to all the income of the trust while either of them are living and that no one other than themselves would be entitled to receive or use any of the capital of the trust during their lifetimes. Upon their death, the property of the trust would be distributed to you and your siblings. The purpose of such a trust is to avoid the probate costs imposed by the state of Florida.

The circumstances outlined in your letter relate to a specific fact situation. As explained in Information Circular 70-6R5, dated May 17, 2002, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. However, we are prepared to provide you with the following general comments.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

When an individual transfers property to a trust, the transfer generally results in a disposition of the property by that individual for proceeds of disposition equal to the fair market value of the property at that time, possibly resulting in a taxable capital gain or allowable capital loss that is reported on the individual's income tax return for the year in which the transfer takes place. In the circumstances described in subsection 73(1) however, the proceeds of disposition to the transferor and the cost of acquisition to the transferee are deemed to be equal to the transferor's adjusted cost base immediately before the transfer as determined under section 53, or in the case of depreciable property, a proportion of the transferor's undepreciated capital cost of the relevant capital cost allowance class, which would presumably not result in a taxable capital gain or allowable capital loss.

Provided that no capital cost allowance has been claimed on any depreciable property that is the subject of the transfer and that none of the events described in section 53 have occurred in respect of the property transferred, the adjusted cost base of the property transferred or the relevant proportion of the transferor's undepreciated capital cost of the class that includes the depreciable property transferred would normally be equal to the cost of acquiring the property so transferred. If the asset was acquired before 1972, additional adjustments may be required.

Subsection 73(1), in combination with subsections 73(1.01) and 73(1.02), generally provide that an individual may transfer property to a spousal trust, an alter ego trust, a joint spousal or common-law partner trust or to a trust described in subparagraph 73(1.02)(b)(ii) often referred to as a self-benefit trust on a tax deferred (rollover) basis. The rollover is only available if the individual and the trust are both resident in Canada, without regard to the application of section 94.

Essentially, an alter ego trust is a trust established after 1999 by a living individual who is at least 65 years of age where that individual is entitled to receive all the income of the trust arising before his or her death and under which no person except that individual may receive or otherwise obtain the use of any of the income or capital of the trust before that individual's death. A joint spousal or common-law partner trust is also a trust established after 1999 by a living individual who is at least 65 years of age; however, under the rules relating to a joint spousal or common-law partner trust, it is the individual and his or her spouse or common-law partner that must be entitled to receive all the income of the trust arising before their deaths and the terms of the trust must provide that no one other than the individual or the individual's spouse or common-law partner is permitted to receive or otherwise obtain the use of any of the income or capital of the trust before the death of both the individual and the individual's spouse or common-law partner. For the purpose of section 73, the income of a trust is the income of the trust computed for trust accounting purposes minus certain dividends set out in subsection 108(3).

One of the conditions that must be satisfied in order for subsection 73(1) to apply to the transfer of the property to the trust is that the trust must have been created by the individual seeking to rely on that subsection. In the circumstances in which a couple jointly owns the property which is to be transferred to the trust, it is possible for both of the joint owners of the property to rely on subsection 73(1) in respect of the transfer of the jointly-owned property to a trust that meets the conditions set out in subparagraph 73(1.01)(c)(iii) provided that it is the jointly-owned property that is used to create the trust.

Note that any distribution of property held by an alter ego trust or joint spousal or common-law partner trust to a beneficiary other than the individual or the individual's spouse or common-law partner during the their respective lifetimes will be subject to subsection 107(4) such that, among other things, the trust will be deemed to have disposed of the property for proceeds of disposition equal to its fair market value at that time. In addition, subsection 104(4) provides that an alter ego trust or a joint spousal or common-law partner trust will be deemed to have disposed of all of its properties at the end of the day on which the individual dies (or, in the case of a joint spousal or common-law partner trust, the later of the day on which the individual dies and the day on which the individual's spouse or common-law partner dies) for proceeds equal to the fair market value of the property at that time and the trust will be deemed to have acquired the property immediately thereafter at a cost equal to that same amount. This will generally result in the trust reporting taxable capital gains and paying any taxes due thereon in the year in which the relevant death occurs.

Note that subsection 75(2) may apply to the income earned on property transferred to an alter ego or a joint spousal or common-law partner trust. For example, where the settlor of an alter ego trust or a joint spousal or common-law partner trust is a capital beneficiary of the trust, subparagraph 75(2) will apply during the period in which the settlor is resident in Canada. Interpretation Bulletin IT-369R, Attribution of Trust Income to Settlor, provides additional information concerning the application of subsection 75(2).

All interpretation bulletins and information circulars referred to in this letter are available on the Canada Revenue Agency website at http://www.cra.gc.ca.

In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion and, as such, should not be construed as an advance income tax ruling, nor are they binding on the Canada Revenue Agency.

We trust our comments will be of assistance.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch